On the real effects of private equity investment: evidence from new ...

young …rms across the full range of NACE Rev 1.1 industries.We match that data to data from the European Venture Capital Association (EVCA) onprivate equity investment in general and start-up …nance in particular in Western Europe andsome Central European countries. We average the data from 1998-1999 to match with the…rst wave of Amadeus, and from 2006-2007 for the second wave. We examine 16 countries,37 NACE double-digit Rev. 1.1 industries, and 14 EVCA industry classes.We …nd that private equity investment has a bene…cial e¤ect on entry, which is relativelyhigher for industries which naturally have higher entry rates and are more R&D intensive.The e¤ect remains strong once we exclude investment allocated to buy-outs, suggesting thatearly stage …nance is important in this respect. Our results hold both in 1998-1999 and 2006-2007, when we account for industry size, and when we exclude the transition economies. Theresults stay unchanged after we address the endogeneity problem (does private equity induceentry or is it attracted to countries with a more dynamic industrial structure?) by usingan IV procedure in which variation in national prudential regulation guiding the investmentbehavior of Europe’s pension funds is used as an instrument for the supply of PE funds.We argue that by o¤ering a unique combination of ownership and incentives, private equityinvestment seems to lower the cost of start-up capital and result in higher industry dynamics.The results are generally robust to using di¤erent proxies for entry, contemporaneous orhistorical volumes of private equity investment, and to correcting for omitted variable bias.We also …nd that the e¤ect of private equity is higher in countries with better judicialsystems and in countries with smaller share of the informal economy. This result is onlylogical: to the extent that private equity targets industries that rely heavily on intangibleassets like intellectual property, licenses and patents, its e¤ect should be more pronouncedin countries where the returns to those are protected by the legal system. At the same time,we …nd that the relatively higher e¤ect of private equity investment on entry in high-entryindustries is robust to accounting for other industry characteristics, as well as for othercharacteristics of the business environment that have been suggested by the literature asdeterminants of entry rates.ECBWorking Paper Series No 1078August 200931